We need a big-picture budget like no other

Oct 11, 2020
Originally posted on Business Post 11 October 2020.

Budget 2021 will be like nothing that came before it. The Budget Day rulebook is out the window as the Ministers for Finance and Public Expenditure and Reform prepare to announce their plans on Tuesday.

There will be no giveaways, just restitution in 2021 for lost earnings, lost opportunities and lost jobs in 2020. Given that many businesses are already feeling the tighter pinch less than a week into level 3 Covid-19 restrictions nationwide, getting it right is critical.

For decades, successive finance ministers could expect robust but knowledgeable exchanges from their opposition counterparts on budget day. This year, for reasons either of temperament, experience or scale, there is unlikely to be much in the line of constructive criticism coming from the opposition benches.

Public interest in budgets used to typically centre around two things – the alterations to personal taxation and the changes to social welfare benefits. Beyond that, interest quickly faded. It meant that the role of the Minister for Public Expenditure and Reform on budget day was a particularly thankless one as, rightly or wrongly, the Minister for Finance had all the action points. That should not be the case this year.

The priority on Tuesday for Paschal Donohoe, the Minister for Finance, must be not to scare the fiscal horses, as 2020 tax receipts were generally better than could have been hoped for. Just three weeks ago, he passed up one opportunity for raising taxes: the revaluation of houses for local property tax, which would also have brought thousands of homes constructed since 2013 into the net for the first time. On that basis, it is hard to see that there will be any significant tax-raising measures from the hard-pressed public next week.

In fact, there are strong arguments for providing some additional income tax relief. Last month’s tax strategy group papers suggested increasing the PAYE tax credit as a counter to the Revenue’s ill-judged attempts to remove relief for flat rate expenses for workers. A better argument for raising both the PAYE credit and the earned income credit is that almost half the workforce are going to find themselves in tax arrears next year because of untaxed temporary wage subsidies and pandemic unemployment payments during 2020.

The trend of more people working fully or part-time from home is not going to fade even after the pandemic, and this crisis should prompt a simplifying of the tax rules. For example an employer can provide an employee with a computer to work from home without any tax consequences, yet if the same employee buys the same computer themselves for the same purpose, they will have trouble getting a tax deduction for it. Another area due for revision are the rules for travel expenses if employees must visit external sites or clients when working from home.

Similarly, the charge to corporation tax depends to a surprising extent on where the senior executives of companies are located rather than the location of business operations, and there is scope to formalise rules which better reflect working practices in a pandemic. Efforts to retain the foreign direct investment pool which is bolstering jobs and corporation tax receipts must feature on Tuesday.

There also are opportunities for improving the tax regime for capital investment which would benefit indigenous industry just as much as the FDI sector, but that won’t be enough. Public sector capital investment is a far more potent economic tonic because of its scale. Much is expected from the Minister for Public Expenditure and Reform, not just by way of business and wage supports, but also by way of capital expenditure programmes. A heavy commitment to capital expenditure on Tuesday would make sense even without a pandemic, as money has never been cheaper.

The impact of Tuesday’s budget will not be seen in the usual tables of figures showing a few euro per week here and there for different categories of workers and income levels. The analysis must be drawn on a much bigger canvas, focusing on which sectors will be provided with additional supports, and what is being done to retrain and re-skill workers whose jobs have disappeared (perhaps permanently) in the pandemic. There are signs the government accepts that business is reluctant to take on additional debt to weather the storm, and so the state must do so instead.

A lasting effect of Budget 2021 will be more government influence on business. Supports of all types now require certification of tax clearance, continued “self assessment” of eligibility and a willingness to appear on a public roll of companies which have benefited. The conduct of the Temporary Wage Support Scheme to date suggests that there will be blanket scrutiny of businesses which availed of pandemic assistance. That may not be a bad thing in itself, but will this level of scrutiny and reporting be rolled back as the need for business supports dwindles? Past experience suggests it will not.

Tuesday’s budget must be about a national response to coping with the coronavirus and the impact of Brexit, however severe. Its success is dependent on spending programmes, rather than tax programmes. Both ministers need to get it right.

Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland.